Polish Rate Setter Hausner: MPC Should Expand Forward Guidance

Patryk Wasilewski scored an exclusive interview with Polish rate setter Jerzy Hausner on Oct. 28 in which he said the country’s central bank needed to broaden its policy on forward guidance to better communicate factors that will drive future monetary policy decisions.

He also said further rate cuts weren’t on the cards and that rates were likely to remain unchanged into 2014 compared with recent central bank comments that no move was expected before the end of 2013.

The interview cast light on the central bank’s current thinking since it slashed Polish rates to record lows over a seven month period to defend the country’s economy against fallout from the European financial crisis.

The comments on forward guidance suggest Poland may be ready to follow the European Central Bank’s example in offering early indications of likely future policy changes, a decision that has helped calm sovereign debt markets in recent months.

This is how the full story appeared on DJX:

By Patryk Wasilewski

WARSAW–Poland’s monetary policy council should broaden its forward guidance policy to better communicate factors that will drive future monetary policy decisions, council member Jerzy Hausner said in an interview with The Wall Street Journal.

The nine-member strong rate panel in July said the council will keep interest rates unchanged at an all-time low of 2.5% until the end of 2013, after a seven-month long easing campaign, and now the time has come to send another signal to the markets, Mr. Hausner said.

“Forward guidance as an instrument was well received and works,” Mr. Hausner said. “I would want our future forward guidance not to relate to when we could change the line of our monetary policy, but rather what conditions have to be met in order to consider such a change.”

Poland’s move to introduce forward guidance to an extent mirrored earlier moves by the Federal Reserve and the Bank of England, who have said they will keep their current policies in place until unemployment falls below specific levels.

However, that is not a scenario Mr. Hausner sees as possible in Poland.

“Certainly it is not, like in the Fed case, of setting numerical benchmarks determining future decisions,” Mr. Hausner said.

The rate setter would want to hinge future decisions mainly on the inflation outlook and risks the inflation rate could in the foreseeable future leave the council’s “comfort zone” of 1.5%-3.5%, with some consideration for growth relative to its potential level.

“Inflation is our main benchmark, our main aim that we focus on,” Mr. Hausner said. “Therefore we should be especially focused on signals of potential change in trend in this area and inflation pressures. However, we can’t ignore growth,” he said.

Inflation in Poland eased alongside a slowing economy and in recent months stabilized at 1.1%, significantly below the central bank’s 2.5% target, but is widely expected to gather pace in 2015.

Mr. Hausner said Poland’s economic expansion could accelerate to 3% in the near future, if domestic demand is reinvigorated, without triggering any significant inflation pressures. However, significantly faster economic expansion would lead to economic imbalances and wouldn’t be sustainable in the long term.

After several years of unexpected resilience to global economic troubles, Poland’s economy showed signs of wear from the European Union’s debt crisis. The economy slowed to a crawl in the first quarter, prompting the rate panel to ease monetary policy. Growth in the second quarter reached 0.8% annually from 0.5% in the first three months of the year.

An additional benefit of forward guidance, besides improving communication with markets, is keeping the rate panel focused on potential future scenarios and factors affecting the Polish economy rather than looking at the past macro performance, Mr. Hausner said.

Mr. Hausner said, for now, the interest rate level of 2.5% is “adequate” for the Central and Eastern Europe’s largest economy and the rate panel is likely to keep that level unchanged sometime into 2014, extending on its promise to keep rates unchanged until the end of this year. Economic factors at the moment are “balanced,” he said. “Economic growth remains below potential and there are no inflationary pressures,” he said.

When the time comes to change monetary policy it will most likely be tightened, Mr. Hausner said, with expected economic recovery limiting room for monetary easing. Another rate setter, Elzbieta Chojna Duch said earlier this month she will motion for a rate cut in coming months.

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